Sonida Senior Living Inc (SNDA) 2010 Q4 法說會逐字稿

Good day, and welcome to the Capital Senior Living fourth-quarter 2010 earnings release conference call. Today's conference is being recorded.

The forward-looking statements in the release are subject to certain risks and uncertainties that could cause results to differ materially, including but not without limitation, to the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions, such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles, interpretations among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time, I would like to the call over to Mr. Larry Cohen.Please go ahead.

Thank you. Good morning, and welcome to Capital Senior Living's fourth-quarter and full-year 2010 earnings release conference call.

First, I'd like to review highlights for the fourth quarter. By focusing on our core strengths, we produced strong results in the fourth quarter of 2010 and laid the groundwork for continued success. We achieved better occupancy, higher average monthly rents, and stronger cash flow. We increased our resident capacity while enhancing our geographic concentration and maximizing our competitive strengths within our markets. And most importantly, we enhanced shareholder value through growth in revenues, margins, and cash flow. We are well positioned to leverage these positive trends with the recovering economy and improving industry fundamentals in 2011 and beyond.

CFFO increased 31.3% to $5.6 million, or $0.21 per share in the fourth quarter of 2010, an increase of $0.05 per share from the fourth quarter of 2009. Revenue of $59.9 million for the fourth quarter 2010 increased $11.2 million, or 23% from the fourth quarter 2009. Adjusted EBITDAR improved over the fourth quarter of 2009 by $6.3 million, or 43.5% to $20.9 million, with EBITDAR margin improving to 34.9% from 29.9% in the fourth quarter of 2009.

Next, I'd like to discuss transactions announced during the quarter.In December, we announced that a joint venture, in which Capital Senior Living holds 5% partnership interest, entered into an agreement to sell four senior living communities to Health Care REIT.We are awaiting under approval and expect the transaction will close later this month, at which time we will lease the communities from Health Care REIT.

This transaction is expected to generate approximately $17 million, compared to our original investment of $1.3 million, increase annual revenue by $26 million, add $12.2 million of EBITDAR, $0.03 per share of additional cash flow from operations, and $0.07 in incremental earnings per share. The Spring Meadows transaction was the fourth significant transaction we announced in 2010. The other three closed in the second and third quarters of 2010, and their benefits are reflected and our fourth quarter 2010 results.

I'd like to review operating activities in the fourth quarter. The number of consolidated communities increased from 50 in the fourth quarter of 2009 to 70 in the fourth quarter 2010. Consolidated average occupancy was 85.1% in the fourth quarter of 2010, a 40 basis-point increase from the third quarter of 2010 and a 90 basis-point increase from the fourth quarter of 2009.

Average monthly rent improved 8% to $2,756 per occupied unit from the fourth quarter of 2009. This was a 3.9% increase in average monthly rent from the third quarter of 2010. I'm encouraged that our movements in the quarter increased 14% from the fourth quarter of 2009, with independent living movement increasing 29%.

Deposits in the fourth quarter of 2010 increased 21% from the fourth quarter of 2009. Fourth quarter independent living average occupancy increased 180 basis points, with a 1.6% increase in average monthly rents from the third quarter of 2010. This was the best quarterly improvement in independent living occupancy and rate since 2007.

Assisted living average occupancy increased 130 basis points, with a 9.4% increase in average monthly rent from the fourth quarter of 2009. And on a same-store basis, average occupancy for the quarter increased 30 basis points, and average monthly rent grew 0.9% from the third quarter of 2010.

I'd like now to discuss our growth initiatives. We were very excited about our opportunities in the next few years, as seniors housing is a needs-driven product, new supply is at a very low level, and demographic demand growth is being driven by an aging population. These favorable demands and supply-demand trends in an improving economy should allow for greater occupancy and rate growth.

We expect further improvement in our operations from our implementation this quarter of Internet marketing and social-media initiatives, as well as software programs for care plans and level of care charges. We are also investing in cash-flow enhancing renovations, refurbishments, and conversions of units to higher levels of care. These initiatives, combined with the operating leverage in our prudently financed business, are expected to increase our revenues, margins, and cash flow. Each 1% improvement in occupancy is expected to generate $3 million of revenue and $2 million of EBITDAR.

We are in the process of converting 170 units to higher levels of care, which, when stabilized, are expected to add $5 million of incremental revenue and $3 million of EBITDAR. We differentiate Capital Senior Living from other senior-living providers in a highly fragmented industry as being the value leader in providing quality senior living and care at the right price.

We have a simple and transparent financial structure. We enjoy an excellent reputation, achieved a 95% satisfaction rating from our residents for 2010, and attract the best talent in the senior-living industry. I had the pleasure this week of welcoming 20 newly hired executive directors, including 12 from our recently acquired Signature communities, to Capital Senior University, and I am pleased to report that they are exceptional. Our talented and dedicated team members, our lower operating cost resulting from our group purchasing programs, and proactive expense management systems, the superior activity and care programs offered to our residents, and our effective pricing strategies are Capital Senior Living's biggest competitive advantages.

As we execute our strategic business plan, we are enhancing our geographic concentration with expanded care to residents, maximizing our competitive strengths, and lowering our cost of capital. Our strategy is focused on generating attractive returns, enhancing free cash flow, and maximizing shareholder value. The 500 basis-point improvement in EBITDAR margin we recognized in the fourth quarter 2010 demonstrates our ability to take advantage of our regional operating centers in geographically concentrated markets and layer in our economies of scale and systems to integrate acquisitions and a highly profitable manner.

We will be receiving $17 million upon closing of the Spring Meadows transaction later this month. We plan to invest these proceeds, along with available cash on our balance sheet, in acquisitions of senior-living communities. We have an attractive pipeline of off-market accretive acquisitions that will further enhance our geographic clusters, and we are looking forward to announcing these in the near future.

I'm very excited about our outlook. We are well-positioned to grow cash flow and increase shareholder value as we execute on our strategic plan. Our positive performance during one of the most challenging operating environments demonstrates the resiliency of our needs-driven business model and operating platform. Our fundamentals are strong, and I am excited about the Company's prospects as we benefit from needs-driven demand growth with virtually no new supply in an improving economy.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the fourth quarter and full year 2010. Ralph?

Thanks, Larry, and good morning. I hope everyone has had a chance to see the press release, which was distributed last night.In the next few minutes, I'm going to review and expand upon highlights of our financial results for the fourth quarter and full-year 2010.If you need a copy of our press release, it has been posted on our corporate website at www.capitalsenior.com.

The Company reported revenue of $59.9 million for the fourth quarter of 2010, compared to revenue of $48.7 million for the fourth quarter of 2009, and increase of $11.2 million, or 23%.In the second and third quarters of 2010, the Company converted eight communities that were previously owned in the Midwest I and Midwest II joint ventures to leased communities, and added 12 new leases from the Signature transaction.So the number of communities we consolidated on our income statement increased from 50 in the fourth quarter of 2009 to 70 in the fourth quarter of 2010.

Financial occupancy of the consolidated portfolio averaged 85.1% for the fourth quarter of 2010, compared to 84.2% in the fourth quarter of 2009, an increase of 90 basis points. Average monthly rent was $2,756 per occupied unit in the fourth quarter 2010, an increase of $203 or 8% from the fourth quarter of 2009. Operating expenses for the fourth quarter of 2010 were $33.8 million, increasing $7.5 million versus an increase in resident healthcare revenue of $13.4 million. As a percentage of resident healthcare revenue, operating expenses were 59.7% in the fourth quarter of 2010, compared to 60.9% in the fourth quarter of 2009, an improvement of 120 basis points.

General and administrative expenses of $2.5 million were approximately $0.5 million lower than the fourth quarter of 2009. As a percentage of revenue under management, general and administrative expenses were 3.9% in the fourth quarter of 2010. Adjusted EBITDAR for the fourth quarter of 2010 was approximately $20.9 million, and adjusted EBITDAR margin was 34.9% for the period. EBITDAR increased $6.3 million, and margin improved five full percentage points from the fourth quarter of 2009.

The Company net income of $1.6 million, or $0.06 per share, in the fourth quarter of 2010 versus net income of $0.8 million, or $0.03 per share in the fourth quarter of 2009. Excluding costs related to recently completed transactions, and amortization of resident leases acquired, net income for the fourth quarter of 2010 was $2 million, or $0.08 per share. Adjusted CFFO was $5.6 million, or $0.21 per share in the fourth quarter of 2010, compared to $4.3 million, or $0.16 per share, in the fourth quarter of 2009.

Moving to the full-year results, resident and healthcare revenue of 2010 increased to $25.7 million, or 15%, from 2009. At communities under management, same-store revenue in 2010 increased 3.1% versus 2009.Same-community expenses increased 2.4%, and net income increased 4.2% from the prior year.

Margins improved 50 basis points from 2009 to 2010, as both food and labor costs were tightly controlled. The Company renewed for another three years its group purchasing program, which provides outstanding protection against food price volatility. Over the last three years, food-price increases on covered products have increased a little more than 1% per year through negotiated price caps.

Adjusted EBITDAR improved over 2009 by $11.3 million, or 19.7%, to $68.6 million.EBITDAR margin for 2010 was 32.4%. Adjusted CFFO in 2010 was $19.7 million, or $0.74 per share, an increase of approximately $3 million, or $0.11 per share.About half of the increase in CFFO was due to higher net income.

The Company ended the year with $37.6 million of cash and cash equivalents, including restricted cash.And in 2010, cash increased by $6.4 million, while debt was reduced by $7.5 million. As of December 31, 2010, the Company financed its 25 owned communities with 24 mortgages totaling $174 million at fixed interest rates averaging 6%. The Company's nearest mortgage maturity is third quarter of 2015. Our debt, net of restricted cash, was approximately 3.7 times our fourth-quarter annualized EBITDA.

Capital expenditures for the year were approximately $8.4 million, representing $4.7 million of investment spending and $3.7 million of recurring CapEx. The Company spent approximately $500 per unit on recurring CapEx in 2010. At this time, we'd like to open the call to questions.

The question-and-answer session will be conducted electronically.

(Operator Instructions)

We will go first toJerry Doctrow with Stifel Nicolaus.

Filling in for Jerry. I just want to see if I can get more color on the pipeline, the acquisition pipeline, in terms of size on balance sheet, off balance sheet, and whether you are leaning towards, say ,independent living or assisted living or accommodation properties. Just a little bit more color on what the pipeline is.

Sure, I'll be happy to discuss that. As I mentioned, we are sitting at the end of the year with over $30 million in available cash. We have another $70 million coming in upon closing the sale of Spring Meadows.

There's a very favorable financing market today from Freddie and Fannie, as well as other lenders. A couple of the banks and insurance companies that are still financing proven operators of senior-living communities. We are looking to buy right now directly into the Company, communities mostly assisted living, for our multiple levels of care, with maybe some independent, but predominantly AL communities.

In the markets in which we operate, primarily in the central part of the country, and as I said, as we know, we hired an executive in the fall who has a dozen years of banking and health care REIT experience in acquisitions and senior housing. He has added to the relationships we have within the industry of finding opportunities from regional and local operators.

The typical transaction will probably be in kind of two- to five-property transaction, which has been very typical of our acquisition strategy over the last number of years. We think that there's obviously, with the billions of dollars of transactions that have been announced this year alone by the Health Care REITs there's a lot more activity brewing. A lot more interest, a lot bringing sellers into the marketplace. And we feel that from a pricing standpoint, we can acquire properties at attractive pricing, not the full pricing that the REITs are playing for the larger, kind of high-end and (inaudible) market transactions.

If you look at our slide presentation, we have an example of $100 million transaction with typical financing that we expect the initial cash return on investment for the type of properties we are looking at will probably be in the 12% to 14% with return, so they are highly accretive. And they also are very strategic, fitting into the geographic focus that we have as we look to operate our property.And the economics of the transactions we are looking at we expect would improve our metrics, improve our cash flows, and improve our margins.

Do you have any LOIs out today?

We do.

You do.Okay. I also wanted to turn to just general trends that you're seeing in senior housing. You specifically talked about the good trends in independent living.Are you continuing to see those trends improve or stabilize in the first quarter here?

We have. We had a very good January in all levels of care. Obviously, February we were hit by the ice storms in Texas and elsewhere around the country. But the good news is we are seeing a very good March. There's a lot of pent up demand.

We typically find, when you have a catastrophic weather that we experienced in many parts of the country this year, it's a wake-up call to a lot of elder seniors and their adult children that mom or dad is just not safe to live alone. In Texas, people couldn't get out of their house for four days. And obviously, we had tremendous staff.We have a gentleman who works in Fort Worth, who's in our wait staff, who walked two miles every day in the ice storm to work to be able to serve our residents. So we have a lot of terrific stories throughout the Company of service way beyond the call of duty.

So, we're very encouraged.One thing that we have done, and I think starting in the first quarter, we're going to have a supplemental schedule that will go back over the last two, three years, quarter-by-quarter, that will show the occupancy and rate changes quarter-to-quarter of our independent and assisted-living properties. As I mentioned, we had the best quarter in the fourth quarter, with 180 basis-point growth in revenue growth. We actually have seen since the second quarter of 2010, good growth in rate and occupancy in independent living.And assisted living clearly has been very steady this year and then it's -- we're benefiting as well from the Signature transaction, where we added 12 very high-quality assisted-living properties with high rates, high occupancies that improve our metrics.

Larry, do have any same-store occupancy and rate info for the independent living q-over-q?

I do. I do.The independent living is the same-store.Actually, the numbers I gave you the growth -- same-store independent-living occupancy is up 180 basis points.

Is that year-over-year or q-over-q?

That's q-over-q. Third quarter to fourth.

It is q-over-q.

180 basis points quarter-over-quarter, and the average monthly rate is increased from $1,853 in the third quarter to $1,883 in the fourth quarter, which is at a 0.9% improvement in the quarter.

Okay, I guess the last question I have here is on the group-purchasing program. I just wanted to make sure I understood.Is there three years left on the food group-purchasing program, or something less than that? And do you have any kind of group-purchasing or utility contracts on your properties now? What do those expire? We've all seen the oil prices go up and expect energy prices to go up, so I just want to better understand your group-purchasing and your utility purchasing.

The group purchasing was resigned in the third quarter of 2010 for three more years. So that will continue through the third quarter of 2013. That includes -- we have committed manufacturer agreements on 20,000 products. So it's not just food.The scope is way beyond that -- on carpet, on HVAC, PTAC systems.

So it's a very, very broad program, from the largest group-purchasing power in the health care industry. We have in that program contract notices with caps some increases. And if you go back on the last three years on food alone, without these contracts, food costs in the last three years increased 18.4%. However, because of these programs, our increase was only 4.7%.

So, we've seen a dramatic consistent payment on our food costs.In fact, in January of 2011 our raw food cost is, to the penny, identical to what it was in January 2010. So there's been no change whatsoever.

Utilities?

Utilities, we have contracts in Texas, Ohio.We're negotiating some other states, and those typically run for another two or three years.

Okay.That's all for me today. I appreciate your comments. Thank you.

Thanks, Dan.

(Operator Instructions)

We will go next to Todd Cohen with MTC Advisors.

Just had a couple questions to clarify. So, Larry, what do you attribute the significant improvement you're seeing in independent living to? I mean, the metrics you've given are fantastic, so I'm just kind of wondering what you think is going on there?

I think it's a couple. One, the economy is improving. Consumer confidence is improving. The housing market, while prices are falling, they're becoming more affordable. I think we've always spoken about the markets in which we operate and the fact that we have some of the best housing markets in the country, particularly in Texas.

It actually even has rate growth.There was a case, [Schiller], economic study that was presented at [NIC] last week showing that Texas is the -- continues to be the best state in the country, so we're benefiting from that. We, in the last three, four years have realized that the age and the frailty of our independent living residents is growing. And to accommodate the needs, we have rented space to the best-of-class home-care provider in that market to be available to contract and serve our residents.

Many of our independent-living properties have occupational and speech rehab. There are doctors' offices.There are a lot of care plans being offered to our residents.

We have a phenomenal activities program. We celebrated this past month one of our communities, karaoke for two hours. We have our Wii bowling leagues competing against other properties. So, there's a life in our communities and that drive a high level of resident referral.

As I mentioned about our competitive advantages, we have -- really enjoy high reputations in our markets -- very, very strong resident satisfaction.And what we're finding is for the home health care, the price point of independent living is very compelling. So, it becomes a very easy decision for needing seniors to move, and actually, it's more affordable than for most of our residents were paying to live at home.

And then on the numbers side, just to make sure I understand things clearly.The $50 million -- let's say $60 million of EBITDAR you reported in the fourth quarter -- for the year, not for the year, but yes --

$68.6 million?

Yes, that $69 million you reported for the year.However, you reported about $21 million for the fourth quarter. So, that would've included a full quarter of all of the monetizations that occurred last year?

That's right, Todd. That's really why the fourth-quarter comparisons are more appropriate than the full-year comparisons, because we did close on Midwest I and Midwest II in the second quarter, Signature at the end of the third quarter, but by the fourth quarter, all three of those transactions are fully reflected.And then of course, we'll see continuing benefit in quarterly comparisons throughout 2011, along with the closing of the Spring Meadows transaction --

So let me just see if my math is right here.Just -- so you report $68 million, $69 million in total EBITDAR for the 2010 year. You're running now at a quarterly rate of $21 million, say, so that gets us to $84 million in EBITDAR on the year. Then can we layer in the 75% of the EBITDAR contribution from the deal that gets closed this month?

Yes.

So you're in effect well over $90 million in EBITDAR for the year without any improvement in occupancies or rate?

That's correct.

Okay. That's what I thought. I just wanted to make sure. Yes, I think that's it. Thanks a lot.

Thank you, Todd.

And at this time, there are no further questions.I'd like to turn it back to our speakers for any additional or closing remarks.

We thank everybody for your participation today on our call. Ralph and I will be available all day if there are any calls you'd like to make offline.We'd be very happy to talk with you. And welcome -- wish everybody a very nice rest of the afternoon. Thank you for much. Bye-bye.

This concludes today's conference.We do thank you for your participation.